Chapter 7 bankruptcy is the most aggressive and widely known form of individual bankruptcy. In Chapter 7 bankruptcy, an individual must meet certain income limitations and agree to allow the courts to liquidate some of their assets as part of the bankruptcy process.
By seizing and selling some of the individual’s assets, the courts help prevent people from accruing substantial assets then filing bankruptcy to avoid the financial obligation to repay creditors. While you might feel comfortable with the courts liquidating recreational vehicles, expensive clothing or valuable collections as a means of repaying your creditors, you may feel much more protective of your home.
Thankfully, homeowners have the right to exempt a certain portion of their home equity when filing Chapter 7 bankruptcy proceedings. Any amount of equity above that amount may be subject to liquidation by the courts, but you can still protect your ownership interest and some of the equity you’ve established through years of payments.
Missouri residents who passed the means test can pick their exemptions
Every state has its own rules when it comes to bankruptcy, and some are more forgiving than others. However, there are also certain federal standards available in the majority of states for people who file bankruptcy. Some states do not allow residents to claim federal exemptions in Chapter 7 filings, but Missouri is not one of those states.
In Missouri, individuals with an adjusted income at or below the state median can seek bankruptcy. State law says that they can use the state homestead exemption that protects $15,000 worth of equity, or they can use the federal exemption, which protects $25,150 in home equity. While it may seem obvious that choosing the exemption with the higher amount is better, that may not always be the case.
It is important for those individuals who have more than $15,000 worth of equity to carefully look at their other assets, as the selection of the federal exemption for homestead property in your bankruptcy will also impact other exemptions you want to claim. If you select one federal exemption, you must use the federal exemptions for all of the assets you hope to protect. Depending on the nature and value of your assets, one set of exemptions will likely work better for you than the other.
Giving up some equity is often better than losing your house
Those who have acquired more than $15,000 in equity may wonder whether bankruptcy really is the right option. However, especially when compared with other debt solutions available, bankruptcy is the most effective and permanent choice.
Losing a few thousand dollars in equity may be substantially better for you than attempting to continue paying on debts for years, potentially endangering your homeownership as a result. For those who aren’t sure which exemptions would work better for them or for those who are very close to the upper limit for the Missouri means test, a careful review of financial circumstances can help ensure the best decisions in a bankruptcy.